IRDA norm on pension products draws flak

seems like an act of benevolence nobody had asked for.The Insurance Regulatory and Development Authoritys (IRDA) new guideline mandating a guaranteed 4.5% return on pension products has left both insurers,who offer pension products,as well as their customers unhappy.Insurers believe that the proposal may make pension products unattractive to prospective buyers.And individuals who bank on pension plans to build the nestegg for their golden years fear that returns from pension plans would be severely hit as the new proposal become effective.The individuals have to find alternative avenues to earn more returns if they have to be financially secure in their retired life.Sadly,their task would get tougher once the proposed Direct Tax Code (DTC) kicks in,as capital gains from mutual fundsthe other route an investor can take to invest in equity are likely to be taxed under the new regime. It just doesnt make any sense.Why do you want to assure returns to a product which is supposed to offer market-linked returns, asks Gaurav Mashruwala,a Certified Financial Planner (CFP).Also,the figure of 4.5% hardly makes any sense,as you have government-backed products like Public Provident Fund (PPF) which offer 8%.True,the IRDA has said it would review the figure from time to time,still I dont see any logic.Think of it.Even your savings bank account gives you 3.5% now and the rate would go up once the interest rates are deregulated.Why would anyone go for a product which has a long lockin period,but offers guaranteed return of only 4.5%. More importantly,the new measure would severely handicap lakhs of individuals who use pension plans from insurance companies to fund their retirement in a country which is yet to have dedicated pension funds.Insurance companies would be forced to adopt a very conservative investment strategyi.e investing predominantly in debt instruments to make sure that they generate at least 4.5% returns.This is goes against the universally accepted principle that equity (or stocks) is the best way to fund ones long term goals such as retirement.India is a young country.Young people should have a healthy component of equity in their portfolio to generate better returns for their retirement.In the long term,equity is the best hedge against inflation, says Rajiv Jamkhedkar,CEO,Aegon Religare Life Insurance.A guaranteed rate of 4.5% will mean that,in the absence of adequate hedging instruments available in the country,investments will largely be in the fixed income instruments.With returns likely to be lower than the inflation rate,that is,negative real rate,it may not meet the actual objective of a pension plan to build a decent kitty for ones golden years.As such,customers may not find it as attractive as earlier,says Puneet Nanda,executive vice President,ICICI Prudential Life Insurance.Conservative consumers will have the benefit of downside protection and will not be exposed to the vagaries of the market, he adds.